|Expand your knowledge
of Leveraged loans and CLO terms. The following glossary includes
definitions and terms that are commonly found on MJX’s
website and monthly letters to investors. The glossary is offered
to enhance your understanding of MJX’s business and is
by no means complete. If you can't find a certain definition,
feel free to contact us.
Agent - One or several lead lenders in a syndicated loan. A Lender who negotiates a transaction on your behalf.
Arbitrage CDO - A CDO sponsored for the purpose of adding value by repackaging collateral.
Arbitrage CDO - A CDO originated to take advantage of the difference between the rate of return on the underlying assets and the cost of funding the liabilities.
Ask Price - Also known as the "offer price" price, it is the price a seller is willing to accept for a security.
Asset Backed Security (ABS) - Bonds or notes backed by loan paper or accounts receivable originated by providers of credit such as banks and credit card companies. These securities are then underwritten by brokerage firms, which offer them to the public.
Asset Swap - The combination of a fixed rate instrument and an interest rate swap of the same maturity where the investor pays a fixed rate, usually the asset's coupon, to receive a floating rate, thereby changing the nature of the asset's coupon to floating on an otherwise fixed rate instrument.
Base Correlation - The market-implied correlation for a tranche or slice of a reference portfolio of assets, setting the attachment point to zero and detachment point to the tranche’s actual detachment point.
Basis - The difference between the CDS spread and the spread prevailing on the cash instrument of the same entity with comparable seniority. A negative basis exists when the cost of buying CDS protection is lower than the spread earned on the cash asset.
Basis Point - A term equaling one one-hundredth of one percent. One hundred basis points (bps) equals one percent.
Basket Credit Default Swap - A credit default swap referencing a basket or a portfolio of reference obligations, such that the protection seller is exposed to the risks of the entire portfolio.
Bespoke CDO - A CDO tailored to meet the specific requirements of an investor, including reference entities, rating, spread, maturity and attachment and detachment points, among others.
Bid Price - The price at which a buyer is willing to pay for a security.
Broker - Someone (person or a firm) who is paid a commission to buy and sell securities on the secondary market for investors. Also, a person who acts as an intermediary between a buyer and seller, usually charging a commission. Since the bank loan and bond market do not have organized exchanges, as stocks do, the price either offered or bid for a given bank loan or bond can vary from broker to broker.
Call - A term used to describe a period of time, which is between the opening and closing of some future markets where the prices are established through an auction process.
Call Date - Date on which a callable bank loan or bond can be redeemed, prior to maturity. If the issuer feels there is a benefit to refinancing the issue, the bank loan or bond may be redeemed on the call date at par or at a small premium to par.
Call Price - The price, specified at issuance, at which a bank loan or bond can be redeemed by the issuer. Also called redemption price.
Call Protection - Established penalties or restrictions on the prepayment of a loan by the borrower for a specified period. Call protection is usually structured into a loan deal at the time of new issue as an incentive for investors to buy the deal. Call protection is generally structured as a premium above par paid by the borrower at the time of prepayment (101.102,etc). In some cases, provisions are written into loan facility agreements preventing prepayment by the borrower for a specific period of time. These restrictions on prepayment are called non-callable periods.
Callability - Ability of an issuer to call a security, usually for the purposes of refinancing at a lower rate.
Cash flow - The amount of cash a company generates and uses during a period, calculated by adding non-cash charges (such as depreciation) to the net income after taxes. Cash Flow can be used as an indication of a company's financial strength.
CDO Square - A CDO whose assets are comprised of single tranches of other CDOs.
CDX.NA - The main family of North American credit default swap indices, consisting of sub-indices such as CDX.NA.IG (investment grade entities), CDX.NA.HY (non-investment grade entities) and CDX.NA.XO (entities that straddle IG and HY), among others.
Close-End Fund - Funds that trade on stock exchanges, are bought and sold at a price set by the market and, hence, are most subject to market volatility. Because closed-end funds do not need to meet redemptions, they can stay fully invested at all times, and thus, post higher yields.
Collateral - Loans are typically secured by all of the borrower’s assets that are pledged as collateral. There is a risk, however, that the value of the collateral could decline, causing the loan to be partially or completely unsecured.
Collateralized Debt Obligation - Generic name for an investment-grade bond offering that is backed by high-yielding debt instruments, such as high-yield bonds or leveraged loans. The most common type of CDOs are CBOs (Collaterized bond obligations) and CLOs (collateralized loan obligations). In some investment literature the term CDO and CBO are used interchangeably, even though technically CBOs are limited to investments in bonds, while CDOs can invest in other types of debt instruments.
Collateralized Loan Obligation (CLO) - A repackaging of leveraged loans by an asset manager who buys the loans in the primary or secondary markets. CLOs are sold to investors in tranches representing different risk and price levels. An arbitrage CLO refers to a CLO in which the asset manager has the ability to buy loan collateral in either the primary or secondary market at attractive spreads and fund this purchase primarily through investment grade debt issued to the international capital markets.
Continuously Offered Fund - Funds that are bought and sold at NAV and can be purchased any time. However, these funds can be typically redeemed only once a quarter, and in a few instances, monthly, and usually at a cost.
Convexity - A measure of the sensitivity of a fixed income instrument’s price to changes in the yield. When the curve is above a straight line connecting two end points, it is convex. When the curve is below a straight line connecting two end points, it is concave.
Correlation - A measure of how two securities move in relation to one another. The correlation coefficient ranges from one (perfectly positively correlated meaning that as one security moves the other will move in lockstep) to negative one (perfectly negatively correlated meaning that as one security moves the other will move in the opposite direction). Positive correlation in obligations covered by a portfolio default swap will mean there is a higher probability that if one of the obligations default, the others may also default.
Coupon - The coupon on a loan is a measure of interest rate, expressed as the interest premium a loan pays above a benchmark floating interest rate. Typically, loan coupons are expressed as a basis point spread over the Libor benchmark interest rate.
Covenant Lite Loan - A loan that does not have traditional covenants. Covenant lite loans may have incurance tests but do not have maintenance tests.
Credit Agreement - The credit agreement is a legal document establishing the terms of the contract between the borrower and the lenders of a loan facility. Credit agreements are drafted and executed at the time a loan is syndicated in the primary market.
Credit Curve - The array of an entity’s credit spreads over different maturities.
Credit Default Swap - A derivative contract whereby the seller of protection agrees, in exchange for a certain premium paid periodically by the protection buyer, that in the event the specified reference entity experiences a credit event, to purchase the reference obligation at par or to make a cash payment equal to the difference between the par value and market value of the reference obligation.
Credit risks - The possibility of a loss occurring due to the financial failure to meet contractual debt obligations.
Credit Spread - The difference, usually expressed in basis points, between the yield on a debt security and a risk-free instrument that are identical in all respects except for credit quality.
Debt Obligations - This is a general term for bank loans or bonds, mortgages, and other kinds of loans.
Default Probability - Statistical estimate of the chances that an entity will default in meeting its obligations within a specified period.
Delta Hedging - A risk-reducing mechanism whereby the exposure of a derivative position to changes in the value of the underlying asset is dynamically managed through offsetting trades in the underlying asset. The proportion of the hedge is the change in the value of the derivative instrument per change in the value of the underlying asset.
Distressed Debt - Any debt security trading at or below 80% of par.
Distressed Security - A security of a company undergoing or expected to undergo bankruptcy or restructuring in an effort to avoid insolvency. As investments, distressed securities are usually very risky because the company might not recover.
Equity - Ownership interest in a corporation in the form of common stock or preferred stock. It is the risk-bearing part of the company's capital and contrasts with debt capital which is usually secured and has priority over shareholders if the company becomes insolvent and its assets sold and are distributed. Also may be definded as total assets minus total liabilities; also called shareholder's equity or net worth or book value. Sometimes referred to as the difference between what a property is worth and what the owner owes against that property.
Equity tranche - the most junior tranche in a CDO structure that bears the first-loss risk and is also entitled to all the residual income of the CDO.
Floating Rate Paper - Paper priced at a fixed spread over a widely accepted base rate (LIBOR or the Prime Rate), and are pegged to the base rate. Floating rate debt is therefore insulated from fluctuations in interest rates.
High Yield - A high-risk, non-investment-grade bank loan or bond with a low credit rating, usually BB or lower; as a consequence, it usually has a high yield.
Highly Leveraged Loan - According to the Loan Pricing Corporation, any loan that is priced at L+225 or greater. Similar to the definition of leveraged loans, this definition can include a great variance of loans due to its reliance on current market conditions.
Institutional Investors - Organizations that buy, or are eligible to buy, leveraged loans. Generally, institutional investors buy the (B, C, D, etc.) tranches of syndicated term loans. Institutional investors are the largest investor category in the leveraged loan market.
Institutional Tranches - See “Term Loan B, C, D, etc.”
Interest Rate - Interest per year divided by principal amount, expressed as a percentage.
Investment-Grade Bond - A bond with a rating of BBB or higher by S & P or Baa by Moody's.
LCDS (Loan-only Credit Default Swap) - a Credit Default Swap that references the senior secured obligations of the reference entity.
LCDX - A credit default swap index that references a basket of 100 North American syndicated secured loans.
Leveraged Loan - According to the Loan Pricing Corporation, any loan that is priced at L+ 125 bp or greater. The credit quality of the loans captured by this definition can vary widely with market conditions as the impact spreads. A comparable definition would include loans issued by companies that have ratings below Baa3/BBB- from Moody’s and S&P, and generally a Debt/EBITDA ratio of 4.0 times or greater.
LIBOR - LIBOR stands for London Inter Bank Offer Rate. It's the rate of interest at which banks offer to lend money to one another in the so-called wholesale money markets in the City of London. Money can be borrowed overnight or for a period of in excess of five years.
Liquidity - The ease with which to convert an asset into cash quickly without substantially affecting the asset's price.
Managed deals - The portfolio manager adjusts the portfolio on a continuing basis within investment guidelines. New issuers may be added and other issues may be sold within the portfolio constraints.
Mandatory Prepayment - A repayment of the principal amount of a loan facility by the borrower triggered by an action of the borrower. Mandatory prepayment provisions are written into the credit agreements of loans to require partial or total repayment of the loan facility in certain specific events such as asset sales, debt issuance, equity issuance, material change of control, etc.
Mark-to-Market (MTM) - The valuation of a financial instrument based on prevailing market prices.
Mark-to-Model - The valuation of a financial instrument based on a valuation model, usually in the absence of market prices.
Market value - The current quoted price at which investors buy or sell a bank loan or a bond at a given time.
Noncall Period - The period following the issue of a security during which an issuer cannot call its issue. A 1ONC5, for example, is a ten-year instrument not callable for five years. Traditionally non-calls periods have been a standard feature of high-yield bonds, only recently part of a leveraged loan structure.
OID - “Original Issue Discount”. A discount provided to investors during the primary market syndication of a new deal. The discount is usually applied on a price basis, so a deal with a 2-point OID would come at a price of 98 or 2 points below par.
Optional Prepayment - Optional prepayments of loans are repayments of principal at the choice of the borrower, rather than scheduled in the general amortization of the loan or mandated by the terms of the credit agreement. As the borrower initiates optional prepayments, the borrower chooses the timing and amount of payment. The terms of the credit agreement establish the order in which loan facilities must be repaid (usually the TLA, then the TLB, then revolver outstandings).
OTC Derivatives - Derivative contracts agreed directly between two parties without the intermediation of a recognized exchange.
Overcollateralized - A term describing the security position of an asset backed facility. An over collateralized asset backed facility has asset coverage in excess of the size of the facility.
Par - The “face value” of a bank loan or bond that the issuer agrees to pay upon the date of maturity. A bank loan or bond trading at face value.
Pari Passu - A term describing an equal claim by investors on the assets of an issuer of securities. The term is generally used in reference to the seniority of a debt issue with respect to other outstanding debt by the same issuer.
Portfolio Credit Default Swap - A credit default swap referencing a basket or a portfolio of reference obligations, such that the protection seller is exposed to the risks of the entire portfolio
Primary Market - The market for newly issued bank loan or bonds. This is the market where bank loan or bonds are purchased by investors from the original underwriter.
Prime Rate - The interest rate used by banks as a benchmark for loans made. This base rate is not commonly used for corporate loans. The Prime Rate is quoted for an overnight period.
Principal - The total amount borrowed, or the part of the amount borrowed which remains unpaid (excluding interest), here also called principal amount.
Pro Rata - The combination of the revolving credit facility and term loan A tranche sold primarily into the bank market. Participating banks receive higher fees and league table titles (Agent, Co-Agent, etc.) by committing above a certain level to the transaction. The tranches are called “pro rata” because banks must commit to equal percentages of the RC and TLA.
Recovery Rates - The average rate of recovery of principal for debtholders in the event of a default by the issuer. Generally, recovery rates are higher on debt at more senior levels of the capital structure that have the initial claim on the assets of the issuer.
Recovery Swap - An agreement between two parties to swap, in the event of a default, the actual recovery on a debt instrument for a fixed recovery rate.
Recovery Value - The market price of a loan immediately following an event of default. Defaulted loans are generally priced based on the market's perception of the likelihood of repayment.
Reference Entity - The borrowing institution whose obligations are used as the reference obligation for a credit derivative transaction.
Reference Obligation - The obligation of the reference entity on which the credit derivative is written. A credit event in the reference obligation will trigger settlement under the credit default swap.
Relative Value - A methodology of comparing two different securities to determine which is the best investment (by looking at the comparable yields and risks).
Revolving Credit Facility (RC) - An unfunded commitment that can be drawn and repaid at the issuer's discretion. RC facilities are usually of 5 to 7 year maturity, although maturities may be as short as 1 year and as long as 8.5 years.
Second Lien - A senior secured debt tranche with a secondary claim on an issuer’s assets behind the claim of the first lien debt. Second lien debt can be either loans or bonds.
Secondary market trading - A market where investors and banks can trade their existing holdings of securities. Secondary market trading is a valuable way for leveraged loan holders to diversify their exposure, take advantage of arbitrage opportunities, invest in attractive deals, or reduce exposure to issuers with deteriorating credit fundamentals.
Securitization - The process of creating a financial instrument by combining other financial assets and then marketing them to investors.
Security - Piece of paper that proves ownership of stocks, bank loan or bonds and other investments.
Single Tranche Synthetic CDO - A synthetic CDO that offers only one tranche of the capital structure, generally tailored as to the rating, spread, maturity and composition of the assets that the investor desires. The issuing bank effectively holds the rest of the capital structure and does not place it. Also known as bespoke synthetic CDO.
Spread - The difference between the bid and the ask prices of a security or asset.
Static deals - The initial portfolio is identified and no new issuers may be added. Issues are withdrawn from the portfolio as the position is amortized or repaid.
Swap Spread - The spread difference between the Treasury and LIBOR curves or the fixed and floating rate markets.
Syndicated Loan - A loan provided by a group of lenders (a syndicate group) and is structured by one or several lead lenders (agents). Traditionally, borrowers had a series of bilateral lines with several lenders. Since the mid-1980's, however, the syndicated loan has become the dominant bank credit product for most large companies. Most syndicated loans comprise several facilities or tranches.
Synthetic Asset - A value that is artificially created by combining other assets, such as securities.
Synthetic CDO - A CDO that generates income by selling protection on a portfolio of credit default swaps instead of by purchasing cash assets.
Term Loan A (TLA) - Bundled with the RC facility, the TLA generally amortizes through the life of the loan and has the shortest maturity of the term loan tranches. Spread and term are typically identical for the RC and TLA. As part of the pro rata facility of a syndicated loan, banks usually hold TLA tranches.
Term Loan B, C, D, etc. (TLB, TLC, TLD, etc.) - The institutional term loan tranches of syndicated loans. Payments on these tranches are usually back-loaded, with interest payments constituting the majority of cash flows in early years. Tranches are designated B, C, D etc. on the basis of maturity. Each successive tranche has maturity later than the previous tranche. For each additional year until maturity, spreads are generally 25 to 75 bps wider.
Total Rate of Return Swap - A transaction whereby one party receives the total return, including interest payments and capital gains or losses, on a reference asset or portfolio of reference assets, while the other receives a certain base rate plus a spread. TRORS allows the TROR receiver to derive the benefit of owning an asset without putting that asset on its balance sheet.
Total Return Swap - A derivative transaction in which party A receives from party B the return on a certain instrument and pays the funding cost (LIBOR + or - a spread). In the event that the instrument swapped yields a negative return at the maturity of the swap, party A would pay party B.
Tranche - Related securities that are offered at the same time, but have different risks, rewards, and/or maturities.
Tranche - A slice of the liabilities in a CDO or a structured finance transaction. There is a hierarchy of liabilities having different attachment points and detachment points of losses. Any such layer in the liabilities is called a tranche.
Unsecured - A debt that does not identify specific assets that the debt holder is entitled to in case of a default occurs.
Up-Front Fees - In a unique feature to loans, investors charge the issuer a fee for investing. These fees vary depending on tranche, size of commitment and the credit rating of the issuer. These fees also offer the investor implicit call protection.
Weighted Average Rating Factor (WARF) - Used by Moody’s Investor Services and represents the number obtained by summing the products obtained by multiplying the Principal Balance of each Collateral Debt Obligation by its Moody’s Rating Factor, and dividing the sum by the Aggregate Principal Balance. Rating Factors in the non-investment grade categories are:
Ba1 - 940
Ba2 - 1350
Ba3 - 1766
B1 - 2220
B2 - 2720
B3 - 3490
Weighted Average Spread (WAS) - A fraction (expressed as a percentage) obtained by (i) multiplying the Principal Balance of each Floating Rate Collateral Debt Obligation by the rate per annum at which it pays interest in excess of LIBOR and dividing such sum by the aggregate Principal Balance of the Floating Rate Collateral Debt Obligations held by the Issuer
Yield - The percentage rate of return in the form of dividends paid on a stock, a bank loan or bond, or a mutual fund.